When you apply for an installment loan, a lender will provide you with a loan contract. The lender uses a loan contract as a formal document regarding the agreement he and a borrower will have during the course of an installment loan. Loan contracts may include negative and positive covenants, guaranties, applicable interest rates and fees, and the amount and mode of repayment of the installment loan. Upon signing the loan contract, a borrower consents to borrow money on the terms offered by the lender.
An installment loan contract is prepared according to the requirements of the Truth in Lending Act in order to inform the borrower of the cost of their loan. Some states may have additional or differing provisions on loan contracts. Since there are some lenders who may be practicing predatory activities, it is important to research the background of your lender. It will also be a big help before signing a loan contract for an installment loan to let a reputable lawyer review it.
A loan contract, in compliance to the Truth in Lending Act, must have the following General Contract Provisions:
- True and clear identification of both the borrower and lender (including the names and addresses)
- Finance charges or the cost of the credit over the course of the loan
- Annual percentage rate (APR)
- Schedule of repayments and the amount to be repaid monthly
- Total amount paid that includes the principal, total interest, other charges and fees
- The right of the borrower to cancel the loan contract but within three days of signing
- Agreements on missed or default payments. This will also include the provisions on repossession (in case there’s collateral).
Mode of Repayment
Installment loans use amortization. This means that a lender will structure the borrowers payments in such manner that the borrower will be paying off the principal and interest by the time he makes the final payment. Usually, the loan contract will include the details of the monthly payment due date.
The loan contract will also include the details for grace periods, typically, ten days after the due date. This will enable the borrower to come up with his payment on time in case the actual due date falls on the weekend.
Interest
Usually, installment loans have fixed interest rates that will remain the same for the entire course of the loan. The interest rates are reflected as annual percentage rates (APRs) in order for the borrower to see how much the loan will cost on an annual basis.
The loan contract will also include the details of the index that influences a change in interest rates. There are also details about payment floors and caps that form part of the agreement. Lenders also indicate on the loan contract the dates if interest rates change during the duration of the loan.
Other Details
Some lenders may offer borrowers credit insurance as part of their installment loan package. This credit insurance is paid on a monthly basis. The insurer will cover your loan payments in case you lose your job or suffer from an unexpected financial event. The details of the cost of the insurance and its coverage are included in your loan contract.
When applying for an installment loan, understanding the provisions under the loan contract is important. Before signing up, borrowers must know what they are about to enter into.